Wednesday, January 4, 2017

Why The Years of Slow Growth?

Popular Economics Weekly

Pundits have decried it. Donald Trump has criticized the ‘lousy’ U.S. economy
in many of his Tweets, and economists have lamented the 2.4 percent GDP growth
rate since 2000, at the time of the dot-com bubble bust. This is when prior
recoveries have averaged 3-4 percent growth—at least in the early years.
The agonizingly slow pace of recovery from the Great Recession is easy to
explain, say most economists. The Economic Policy Institute (EPI), a labor think
tank, recently said it best. It is the result of austerity policies championed
by Republican policymakers at the federal and state levels.

“Like every other postwar recession before it, the Great Recession was caused
by a shortfall in aggregate demand, meaning that the spending of households,
businesses, and governments was not sufficient to keep the economy’s resources
fully employed,” said the EPI.

Per capita government spending in the first quarter of 2016—27
quarters into the recovery—was nearly 3.5 percent lower than it was at the
trough of the Great Recession. By contrast, 27 quarters into the early 1990s
recovery, per capita government spending was 3 percent higher than at the
trough; 23 quarters following the early 2000s recession (a shorter recovery), it
was 10 percent higher; and 27 quarters into the early 1980s recovery, it was 17
percent higher.

What is aggregate demand, and how is it increased? FDR’s incredibly
intelligent Fed Chairman Marriner Eccles explained it in his memoir Beckoning
Frontiers (1951):

He understood our U.S. economy was entering the era of mass consumption, and
unless consumers plus businesses plus government spent and/or invested enough
money in it, there would be little or no growth. If fact, it was the severity of
the contraction in spending that caused both the Great Depression and Great
Recession.

And because there was record income inequality in 1929—only equaled again in
2007—consumers ran out of money to spend, which meant in turn businesses stopped
investing. So it had to be government that injected sufficient demand into the
U.S. economy to keep it from collapsing completely. That was the reason for the
New Deal that employed millions in government-paid jobs, as well as social
security, unemployment insurance and all the social programs that enabled US to
win WWII.

The pickup in government spending in the early 2000s recession and 1980s
recovery were during Republican administrations (i.e., during GW Bush and Reagan
presidencies), which meant they had no problem spending public monies to boost
economic growth. But when it came to Obama’s term, every attempt was made by the
mostly Republican House in particular to cause him to fail.

It began with the election of some 80 Tea Party members to the House in 2010,
then government shutdown in 2011 when they refused to ok a budget, so that the
U.S. government almost ran out of operating funds, resulting in the first loss
of AAA rating for U.S. debt by a bond rating agency in modern history.

That is why real annual GDP growth during Reagan’s term peaked at 7.3
percent, and GW Bush’s term at 3.8 percent. The highest modern growth rate was
achieved during FDR’s New Deal and WWII, which boosted U.S. growth to a peak of
18.9 percent in 1942. Real GDP growth (i.e,, after inflation) has been downhill
ever since.

As CBS News recently wrote in a report entitled, Obama May Become First
President Since Hoover Not to See 3% GDP Growth: “The last year that real
GDP grew by 3.0 percent or more, according to BEA, was in 2005, when it grew by
3.3 percent. Since then, the United States has gone a record ten straight years
(2006-2015) without a year in which the growth in real GDP was at least 3.0
percent.”

So in fact without government spending to boost demand during slow times our
economy has suffered. And now President-elect Trump has proposed a $1 trillion
infrastructure spending plan that is sure to boost growth again.

“Despite the Great Recession being the sharpest and longest on record since
World War II,” wrote the EPI, “and despite monetary policy reaching its
conventional limits to boost spending early in the recession, policymakers made
damaging decisions to limit public spending following the recession’s trough in
2009. This growth has been historically slow relative to other business cycles
even as the economy needed substantially faster-than-average growth to mount a
full and timely recovery.”

So let the record show, government has never been the problem when
Republicans needed to boost growth, only when Democrats do. What is wrong with
this picture?

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Harlan Russell Green, Editor/Publisher

Harlan Green is a Mortgage Broker in Santa Barbara, California since the 1980s and economist. As Editor/Publisher of PopularEconomics.com, he has published 3 weekly columns-- Popular Economics Weekly, Financial FAQs, and The Mortgage Corner-since 2000, and is a featured business columnist for Huffington Post. Please refer to the populareconomics.com website for further information.